Reputation as collateral? — Web 3 Credibility, DID Trilogy (pt.1)

Inerslit

Published in

DoubleSlit

6 min readJul 11, 2022

Credibility assessment methodologies in Defi- Rocifi and Truefi

TLDR;

Why and how should under-collateralized loans be used instead of over-collateral loans with low capital efficiency problems
How Rocifi and Truefi have suggested a way to issue under-collateral-based loans
The difference between the credibility of two protocols-Rocifi and Truefi

Under-collateralized loans based on credit ratings remain a challenge for Defi ecosystem members to solve. The existing over-collateral-based loans are over-secured; however, capital liquidity is tied up, which leads to low capital efficiency. In order for Defi to grow further, not too much capital should be held for loans, leading to a smaller capital flow to the Defi ecosystem.

Rocifi

1. Overview

Rocifi evaluates the creditworthiness of wallets through its own credit rating model. credit rating standard is not only limited to the assets in the wallet, but also evaluates credit risk by combining on-chain records with Twitter, or Dao activities, to provide loan services accordingly and accurately. Even without any collateral, the most creditworthy wallets, for example, can take out a loan by only paying 12% annual interest.

A non-fungible credit score (NFCS), in the form of untransmittable ERC-721, is minted after the credit evaluation process. These credit ratings are categorized from 1 to 10; the larger the number, the lower the creditworthiness. The numbers may increase or decrease depending on additional activities.

They believe this system is the key to making crypto wallets like Metamasks as viable as modern bank accounts. Furthermore, reputation management of decentralized ID (or NFCS in Rocifi) induces users to mature financial activities. This reduces risks within various financial systems.

What’s unique is that it’s possible to get a higher credit rating by combining the records of the multiple wallets owned by a single user.

They are hoping to collect wallet activity across a wide range of chains, enabling more reliable data to be more accessible.

2. Credibility model

2.1 LTV and APR based on credibility

Figure.1 shows the loan condition according to the credit score. Grade 1 offers collateralized loans, grades 2 ~ 6 offer low-collateralized loans, and grades 7 and up require over-collateralized loans.

The APR (interest rate) rises from grade 1 to 6 (under-collateralized loans section), then charges grade 1 interest back again from grade 7 (over-collateralized loans section). This implies that the risks of loans with a grade of 1 credit rating and over-collateralized loans are evaluated equally.

2.2 How to improve credit score

Detailed evaluation criteria are unrevealed but I have gathered some tips on increasing credibility from their medium article:

2.3 Possibilities

In the long term, it seems they want to strengthen the overall DID infrastructure.
It seems that they want to play the central role of a credit rating agency by providing API.
They say they’re thinking about a use case that gives high-credit users higher authority or prioritizes AirDrop in DAO voting.

Comment

Rocifi’s model seems to emphasize the importance of personal convenience as it evaluates creditworthiness based on accounts and records that are readily available to everyone. As a matter of fact, in order to actually lower default risk based on credit ratings, the disadvantage of default must adversely affect credit, and above all, the damage to credit ratings must actually appear as a disadvantage to the borrower. In my opinion, this is the most fatal flaw of RociFi. There are so many alternatives for loans in the DeFi ecosystem that unless the practical usage of RociFi’s credit rating is expanded further, borrowers will easily default on the loan and never return to RociFi. In addition, including social accounts such as Twitter ID in the credit rating model will not result in much of a reduction in default risk since if it damages their reputation as a disadvantage for default, they will not use it at all, and vice versa, there will be no reason to include social accounts if there is no proper punishment accordingly. Automated credit ratings and subsequent attempts to make loans more accessible are certainly a significant advancement to the DeFi ecosystem; however, the expansion of actual and effective usage must come before the actual implementation on various financial systems.

TrueFi

1. How v1 worked

Truefi, which uses Trusttoken as its currency, aims to make DeFi loans more accessible and reliable based on their unique credibility assessment scheme

In Truefi V1, credibility assessments based on under-collateralized loans were carried out in the following ways to achieve a 0% payment rate :

1.Limiting the scope of the borrower

The majority of Borrowers consist of institutional borrowers with clear locations since it’s much easier to fetch and safer for the lenders.

2.Thorough-going loan review

Once the steps from a ~ d are completed, the wallet will be added to the whitelist.
It should receive consent every time the whitelisted wallet applies for a loan again

2. How v3 works

The V1 has been loved by many organizations, but the lack of information or quantification provided to voters(community members) has put a brake on the process, and the team has added more thorough credit rating capabilities to V3.

The credit ratings are now shown in borrowers’ profiles in numbers, 0 to 255. The new indicators to be reflected in credit ratings are as follows:

Comment

The real key factor of Truefi’s credibility assessment seems to be the thorough-going loan review rather than the meaningless(and inefficient) consent from the community members. Not sure whether they are targeting the compliance market in a long-term scenario as well, but in terms of scalability and building a protocol that works autonomously, it seems like they are heading in the opposite direction. There wasn’t a significant difference between existing credit rating models as both largely rely on the screening process itself while most of the DeFi protocols focus on follow-up measures and ensuring efficiency. Thus, the directionality they offer doesn’t quite align with the vision of the Defi ecosystem trying to reduce trust costs and make a more efficient financial system and achieve “trustless trust.” Still, if all of these attempts are towards the balanced consensus between an inefficient but safe existing financial system and automatic Defi finance at the minimum trust cost, I would stay positive on its journey.